Abstract
How should oil-exporting countries allocate revenues from the production of oil over capital accumulation and consumption? How should investment be allocated over traded and nontraded sectors? Most oil-exporting countries are confronted with the problem of maintaining or developing a nonoil traded goods sector because higher oil revenues lead to a high real exchange rate, thereby pulling resources into the nontraded sector-the so-called Dutch disease. The optimal savings response and investment allocation to temporary and permanent increases in oil revenues are derived in this paper.
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